The honest truth about kickbacks

It may be better to get 10 per cent of a booming economy than 100 per cent of a stagnating one

An old joke: a bureaucrat from Sani Abacha’s Nigeria visits a bureaucrat in Suharto’s Indonesia and is impressed that his Indonesian counterpart lives in a nice house and drives a Mercedes. “Do you see that road? Ten per cent,” the Indonesian explains.

A couple of years later the visit is reciprocated. Suharto’s man finds the Nigerian civil servant in a palace with a pair of Ferraris. “Do you see that road?” says the Nigerian, gesturing at virgin rainforest. “One hundred per cent.”

There is more to the joke than meets the eye, of course: Indonesia managed to combine severe corruption with many years of strong growth, while Nigeria stagnated over a similar period. Corruption matters, but so does the type of corruption.

And here is a conundrum. Technocrats have long offered economic policy advice to powerful people in developing countries, yet powerful people may have much more to gain by ignoring the advice and lining their own pockets. The problem is so severe it is a wonder that economies ever develop at all. But the situation is not hopeless, because contrary to the joke, it may be better to get 10 per cent of a booming economy than 100 per cent of a stagnating one.

A new working paper from Michael U. Klein of the Frankfurt School of Finance and Management argues that if elites profit from corruption and control the levers of policy, we should ask ourselves what sort of policy advice might appeal to a corrupt bureaucrat while still being sound economics?

Consider the traditional form of corruption: paying bribes in exchange for favourable treatment. This may be harder than it looks, even in a society where corruption is common: one must still find corrupt partners, establish a deal, and secretly enforce it.

Klein, who studied Nigeria in the 1980s, gives some baffling examples of behaviour that may have been designed to drive away the honest and leave only the corrupt. In one case, the boss of an engineering company arranged to meet the managing director of a large public enterprise after many requests and much waiting. When finally brought into the managing director’s office, he found his counterpart facing the wall. Four hours passed; the only sound was that of a radio playing. Then the managing director turned and a deal was struck.

The waste involved in arranging, monitoring and enforcing corrupt deals can be immense – Klein has found that transaction costs of large projects rise from 3 per cent to at least 10 per cent in “complicated” environments. Prosecutions for corruption can be tough to pull off, says Klein, because big Nigerian firms had no accounts in the late 1970s. (There was also a national tradition of fires breaking out in accounting departments.) All this is dreadfully damaging for growth.

What might work better, while still satisfying the avarice of a country’s elite? One idea would be for elites to hold direct stakes in commercial firms. But the result would still look like a mafia town: too much emphasis on squashing competition and not enough on meeting the needs of customers.

Perhaps this is why export markets have proved such an important element in the success of many Asian economies: domestic markets may be sewn up in corrupt deals, but the government can still insist on export success as a precondition for political favours. Only productive firms are allowed to join the corrupt club – with export markets a good test of genuine productivity. For a case study, consider decades of South Korean growth.

Perhaps there is a touch of fatalism about all this. Eventually one would hope for a world where corruption is very rare. While we’re waiting for that, it’s worth asking how even a corrupt economy can achieve growth.

“So long as there are men, there will be wars” Einstein. I would add: “So long as there are lots of money involved, there will be corruption.”

Corruption will exist until there are no more economic systems in the Planet. Why? Because people are greed, they want more for themselves while others do the hard work. It has always been like that and it will continue been like until a financial collapse occur and people start to riot in the streets.

Well, I think people can change. I think if people start to “wake up” and ask more questions to their governmental leaders, little by little things would start to change.

If you think about it, corruption exists because we allow it to. We do not stand up for ourselves as a nation. This is worldwide. Tell me one country where you can’t find corruption? It became something natural and acceptable, and that’s why it won’t go away without action from the public.

There is plenty of evidence on this type of thing, as well as some interesting theories.

You should look at the work of Mushtaq Khan – http://mercury.soas.ac.uk/users/mk17/ – he’s done some brilliant work showing how patron-client networks are what matters in the market for corruption. Basically, when the patron is strong, he has an incentive to reduce the marginal tax rate from clients (industrial firms), thus ensuring a smaller stake in a larger pie. This was the case in South Korea.

However if the patron is weak, having to placate the interest of a number of clients, the tendency is for the marginal bribe rate to rise. Corrupt officials, now at all levels of the political bureaucracy, take a larger share of the pie, but ensure the pie remains small as there is less of an incentive for growth.

Tim, I honestly wasn’t impressed by this article. It lacks clarity and although you present some good, albeit used ideas, you’ve not expounded them. You start out by offering a prescription but then the tone changes to sarcasm, towards the end. Also, the arguments are ambiguous.